On 2 February 2017, the General Department of Taxation (“GDT”) released Notification 2142, which provides the “market rates” for determining the caps on interest rate deductions for loans that had been entered into using Khmer Riel (“KHR”) and United States Dollars (“USD”) in the 2016 financial year.
The “market rates” for 2016 are as follows:
- For borrowing in USD – 9.47%
- For borrowing in KHR – 15.29%
These rates were gathered by the GDT through the averaging of the interest rates of twelve of the largest Cambodian banks for the USD market rate and three large Cambodian banks for the KHR market rate. The banks were not identified in the Notification.
We note that the literal translation of the Khmer language mentions that the above rate will apply to “money borrowed in 2016”. There is some ambiguity in the use of this Khmer term as it is not certain whether the rate cap will apply only to:
- Interest on loan agreements that were executed in 2016; or
- Interest on loan agreements executed before 2016 but with drawdowns that occurred in 2016 (such as facility agreements).
It would appear from the straightforward application of Notification 2142 that the 2016 drawdowns on facility agreements executed before 2016 should still be considered as “money borrowed in 2016.”
The rationale for the GDT issuing annual market interest rates for taxpayers came about due to the terms of Circular 151 that was released in early 2014. Under Circular 151 the long standing issue with respect to loans with no interest was resolved and in addition a market interest cap was introduced with the objective of restricting the amount of interest deductions that a taxpayer could take for each loan that it contracted. The interest rate deduction cap for Cambodian tax registered borrowers paying interest is based on the following:
- Taxpayers who borrowed money from non-related persons may deduct interest expenses up to 120% of the deemed market rate applicable at the time of the borrowing. (emphasis added)
- Taxpayers who borrowed money from related persons may deduct interest expenses up to 100% of the deemed market rate applicable at the time of the borrowing. (emphasis added)
These interest deduction caps are applied for each loan, and are in addition to the annual deduction limit under Article 12 of the Law on Taxation and Section 5.9 of Prakas on Tax on Profit, which caps the annual interest deduction to the sum of 50% of the taxpayer’s non-interest income and 100% of its interest income for the applicable tax year. Please click on this link to access our alert on Circular 151.
As supplement to the above, Cambodian law prescribes that unless the parties otherwise agree, the interest rate for interest bearing obligations is 5%. Cambodia law further provides that for most transactions, the parties may agree an interest rate of up to 18%. Circular 151 came into effect in early 2014 – we have tabled below the GDT issued market tax rates since its inception.
| Interest Rate (USD) p.a. | Interest Rate (KHR) p.a. | |
| 2013 | 12% | |
| 2014 | 10.15% | |
| 2015 | 10.28% | 19.51% |
| 2016 | 9.47% | 15.29% |
The DFDL tax team is always ready to answer any questions you may have on this and other tax issues.
DFDL Contact
Clint O’Connell
Cambodia Head of Tax
clint.oconnell@dfdl.com
